Taxation of Companies under Nigeria’s Companies Income Tax Act 2011
A country’s tax system is always a key factor for any business, So people often ask such questions which will answered as read on . What is the corporate tax rate? What are the chargeable profit? Is depreciation taxed? What are the capital allowances? Are there any incentives for overseas businesses? Are there double tax treaties in place? How will foreign source income be taxed?
Firstly, Note that all companies in commission in Nigeria outside the Petroleum sector of the economy are required to pay income and education tax. The rate is 30% of total profit for income tax and 2% of assessable profit for education tax. Total profit is profit after deducting previous year losses carried forward and capital allowances. Assessable profit is obtained prior to deducting capital allowances. Resident companies are incorporated under the Companies and Allied Matters Act (CAMA) 2004
Now what is Company Income Tax?
Before the colonial masters arrived in Nigeria, the pre-colonial people already had a functional tax system whereby farmers and traders paid taxes on their harvests. The Northern region particularly observed this law, and they paid to their rulers.
Over the years, the tax law has evolved, in compliance with modern doctrine and advancements, which include the creation of the Nigerian constitution.
The Nigerian tax law makes provisions for different categories of taxes, all of which are remitted to various levels of administrations through the corridors of Federal Inland Revenue Service (FIRS) and Internal Revenue Service (IRS) in all state of the federation.
Companies Income Tax (CIT) is a tax on the profits of registered companies in Nigeria. It also includes the tax on the profits of foreign companies carrying on business in Nigeria. The tax is paid by limited liability companies inclusive of the public limited liability companies. It is therefore commonly referred to as the corporate tax.
Classification of the Assessment in Company Tax (CIT)
Best Of Judgment (BOJ): This is the way which tax is assessed by the relevant tax authority in a situation where the tax payable does not have any financial records or returns submitted to tax authority to base the assessment on. The Best of judgment means of assessment should be applied since financial records are on reliable.
Self-Assessment of Tax Payable: This mean of assessing tax payable is a system where a company pays tax by installment and is permitted by the relevant tax authority to estimate the company’s chargeable income and tax payable for that year of assessment. Self-assessment of tax payable is provided for under section 53 of the Company Income Tax Act (CITA), 2011.
The currency of Assessment: This makes provision for the currency of assessment of tax payable by a company as stated under section 54. Under this section, the Act provides that , notwithstanding anything to the contrary in any law, an income tax assessment under sections 52, 53 or 55 of this Act shall be made in the currency in which the transaction giving rise to the assessment was effected.
Deductions Allowed and Deductions Not Allowed in Company Tax
According, Nigerian tax law their certain deductions that are allowable and deduction that are not allowable.
Section 24 Deductions Allowed
The deduction allowed based on the profit of the company which may be wholly, partly, exclusively, necessarily and reasonably incurred in the production of those profits despite any other provision of this Act, no deduction shall be allowed for the purpose of ascertaining the profits of any company.
Save where the provisions of subsection (2) or (3) of section 14 or 16 of this Act apply, for the purpose of ascertaining the profits or loss of any company of any period from any source chargeable with tax under this Act, there shall be deducted all expenses for that period by that company wholly, exclusively, necessarily and reasonably incurred in the production of those profits including, but without otherwise expanding or limiting the generality of the foregoing‐
a)any sum payable by way of interest on any money borrowed and employed as capital in acquiring the profits;
b)rent for that period, and premiums, the liability for which was incurred during that period, in respect of land or building occupied for the purposes of acquiring the profits, subject, in the case of residential accommodation occupied by employees of the company, to a maximum of 100% of the basic salary of employees;[1996 No. 30. 1996 No. 32.]
- c) (deleted by 2007 No. 56, s. 6 (a));
- d) any outlay or expenses incurred during the year in respect of‐
- salary, wages or other remuneration paid to the senior staff and executives;
- cost to the company of any benefit or allowance provided for the senior staff and executives, which shall not exceed the limit of the amount prescribed by the collective agreement between the company and the employees and approved by the Federal Ministry of Employment, Labour and Productivity, and the Productivity, Prices and Income Board, as the case may be;[1991 No. 21, 2007 No. 56, s. 6 (b).]
- e) any expenses incurred for repair of premises, plant, machinery or fixtures employed in acquiring the profits, or for the renewals, repair or alteration of any implement, utensil or articles so employed;
- f) bad debts incurred in the course of a trade or business proved to have become bad during the period for which the profits are being ascertained, and doubtful debts to the extent that they are respectively estimated to the satisfaction of the Board to have become bad during the said period notwithstanding that such bad or doubtful debts were due and payable before the commencement of the said period:
- where in any period a deduction under this paragraph is to be made as respects any particular debt, and a deduction has in any previous period been allowed either under the Companies Income Tax Act 1961 or this Act in respect of the same debt, the appropriate reduction shall be made in the deduction to be made for the period in question;[1961 No. 22.]
- all sums recovered during the said period on account of amounts previously written off or allowed either under the Companies Income Tax Act 1961 or this Act in respect of bad or doubtful debts shall for the purposes of this Act be deemed to be profits of the trade or business of that period;
- it is proved to the satisfaction of the Board that the debts in respect of which a deduction is claimed either were included as a receipt of the trade or business in the profits of the year within which they were incurred, or were advances not falling within the provisions of the trade or business in the profits of the year within which they were incurred, or were advances not falling within the provisions of paragraph (e) of section 23 (1) of this Act made in the course of normal trading or business operations;
- any contribution to a pension, provident or other retirement benefits fund, society or scheme approved by the Joint Tax Board under the powers conferred upon it by paragraph (g) of section 85 of the Personal Income Tax Act, subject to the provisions of the Fourth Schedule to the Act and to any conditions imposed by that Board; and any contribution other than a penalty made under the provisions of any enactment establishing a national provident fund or other retirement benefits scheme for employees throughout Nigeria;[Cap. P8.]
- in the case of the Nigerian Railway Corporation such deductions as are allowed under the provisions of the Authorized Deductions (Nigerian Railway Corporation) Rules, which Rules shall continue in force for all purposes of this Act[L.N. 195 of 1959.]
Section 27 , Deductions not allowed
Notwithstanding any other provision of this Act, no deduction shall be allowed for the purpose of ascertaining the profits of any company in respect of‐
- capital repaid or withdrawn and any expenditure of a capital nature;
- any sum recoverable under an insurance or contract of indemnity;
- taxes on income or profits levied in Nigeria or elsewhere, other than tax levied outside Nigeria on profits which are also chargeable to tax in Nigeria where relief for the double taxation of those profits may not be given under any other provision of this Act;
- any payment to a savings, widows and orphans, pension, provident or other retirement benefit fund, society or scheme except as permitted by paragraph (g) of section 24 of this Act;
- the depreciation of any asset;
- any sum reserved out of profits, except as permitted by paragraph (f) of section 24 or 25 of this Act or as may be estimated to the satisfaction of the Board, pending the determination of the amount, to represent the amount of any expense deductible under the provisions of that section, the liability for which was irrevocably incurred during the period for which the income is being ascertained;
- any expense of any description incurred within or outside Nigeria for the purpose of earning management fee unless prior approval of an agreement giving rise to such management fee has been obtained from the Minister;
- any expense whatsoever incurred within or outside Nigeria as management fee under any agreement entered into after the commencement of this section except to the extent as the Minister may allow;
- any expense of any description incurred outside Nigeria for and on behalf of any company except of a nature and to the extent as the Board may consider allowable
Profits calculation in Company Tax
In the calculation of profits, adjustments are considered essential in the area of the provisions of the Company Income Tax Act. The accounting profits will be adjusted to arrive at the profits for tax purposes. The profit for tax purpose is referred to as the assessable profits. These adjustments are made to accounting profits in order to arrive at the taxable profits. The adjustments are generally with respect to the following items:
- a) Deductions not allowed
- b) Deductions that are allowed
- c) Items liable to tax but not credited in the profit or loss account
- d) Items credited in the statement of comprehensive income but not taxable
There are provisions in CITA that are relevant to ascertaining the items in a company’s trading transactions that will fall into any of the categories mentioned above and for which adjustment will be essential. Second, in order to arrive at the taxable profit, the following adjustments are then made:
- a) Capital allowances and balancing allowances
- b) Balancing charge
- c) Loss relief;
Computation of Company Income Tax
The computation of company income tax is premised on the determination of the adjusted and taxable profits. However, it is worthy to mention that the minimum tax applicable to company taxation is paramount. However, the subsequent unit of this module will consider the minimum tax applicable to companies in Nigeria. Thus, our emphasis in the computation of company income tax is with respect to adjusted and taxable profits.
Computation of Adjusted Profit
Adjusted profit is computed after adding back, disallowed expenses and deducting allowable expenses and incomes exempted. The value derived from this computation is the adjusted profit and at this point, the education tax rate can be applied. Education tax rate is 2% of adjusted profit.
Computation of Taxable Profit
After arriving at the adjusted profit, there is the need to compute the taxable profit. Thus, the taxable profit is arrived at after adding the balancing charge to the adjusted profit while subtracting the capital allowance and loss relief. The value derived from this computation is the taxable profit and at this point, the relevant tax rate can be applied. The company income tax rate is 30%.
Returns and provisional accounts
Section 55 of CITA
- Every company, including a company granted exemption from incorporation, shall, at least once a year without notice or demand therefrom, file a return with the Board in the prescribed form and containing prescribed information together with the following—
- the audited accounts, tax and capital allowances computations and a true and correct statement in writing containing the amounts of its profits from each and every source computed in accordance with the provisions of this Act and any rules made thereunder;
If you require more information on the above or further advise with respect to company income taxation in the Nigerian environment, write email@example.com or call 08023200801.
Uche Onyeyiri is an avid blogger, writer and a Tax enthusiast. He writes from Lagos.